Three decades of Indonesia's economic growth (2)

This is the second of four articles by Yoshihara Kunio, an economics professor at Kyoto University's Center for Southeast Asian Studies.

KYOTO, Japan (JP): It was in early 1972 when I visited Indonesia for the first time. By that time, the economy had been stabilized, and earnest efforts were being made to create a dynamic economy. I had heard a lot about the American-trained economists who came to the government from the University of Indonesia and were playing a key role in policy formulation and implementation.

The signs of progress were visible then. The economy had grown at 6 percent in 1965-71; between 1965 and 1972, the ratio of investment to GDP grew from 6 percent to 20 percent, and the ratio of exports to GDP from 6 percent to 16 percent. Foreign investment was surging into manufacturing industry. And infrastructure was changing the people's mode of living. Roads were being built in the countryside, and the small pick-up truck (called "Colt") was becoming a popular mode of transportation. Electricity was being extended to rural areas, and in major cities like Jakarta, blackouts were becoming less common.

But the leftist and liberal intellectuals were criticizing the country's new policy as well as the Soeharto administration. I didn't belong to the group, but I was not sure whether the progress made in the past several years would continue. The economy kept improving in the rest of the 1970s, but even in the early 1980s, I was still not sure whether progress was sustainable. For one thing, the 1970s was a lucky decade for Indonesia since there was a large oil price increase. Another concern was the important position occupied by poorly performing state enterprises in the economy. The third concern was a great deal of corruption reported in connection with government intervention and government-initiated programs.

But the economy performed better than I expected in the 1980s. What made me think that Indonesian growth may be genuine is the high growth in the past several years -- the period when high growth has been made possible by making the economic system work better with deregulation and liberalization. For example, the share of state- owned banks in the commercial banking sector is not so dominant as in the mid 1980s; and the big government sponsored project of a conglomerate faces more difficulties in getting trade protection.

The following are the indicators of economic progress often used in economic analysis. Between 1965 and 1933, the share of GDP originating in agriculture declined from 52 percent to 18 percent; the ratio of investment to GDP rose from 7 percent to 29 percent; the ratio of exports to GDP rose from 6 percent to 30 percent; and the share of manufactured exports rose from almost zero to 54 percent.

In rice, the country became self-sufficient in the mid- 1980s. The major reason for this was a rise in land productivity with the introduction of new varieties of chemical fertilizer. And many of the formerly rain-fed paddies were irrigated with small diesel-operated irrigation pumps. As a result, rice production per hectare doubled in Java between the mid-1950s and the mid-1980s, rising from 1.5 to 3.0 tons.

Family planning was also effective in reducing the rate of population growth. In the peak time of the early 1970s, the population was growing at a rate of over 4 percent. Although the peak time differed, all developing countries suffered from high population growth in the post-war period. This was because the balance between birth and death was disturbed. While the birth rate remained roughly constant, the death rate declined with the introduction of antibiotics, DDT, and modern medical techniques. So, what needed to be done was to reduce the birth rate, and family planning was its means. In Indonesia, the government was so effective in its promotion that the rate of population growth came down to 1.6 percent in the mid-1980s. Since then, the rate has been stable roughly at that level.

Economic progress can be best summarized by the growth rate of per capita GNP. In the period 1965-1990, according to the World Bank, Indonesian per capita GNP grew at the rate of 4.5 percent, which was one of the highest in the world. This rate was maintained between 1990 and 1993. Because of such impressive growth, the World Bank called Indonesia a "miracle" economy in the report issued in 1993.

A Filipino friend of mine was telling me in the early 1970s that he and some other Filipinos often went to Indonesia to give advice to the government or corporations there. They prided themselves on being a more advanced nation in the region. For quite some time in the post-war period, their income was the second highest in Asia after Japan. In the mid 1960s, their income was three times that of Indonesia.

But today, Indonesia has caught up with the Philippines. The per capita GNPs of Indonesia and the Philippines are roughly the same at US$900. What happened in the past three decades is that, while Indonesia grew at a healthy rate, the Philippines stagnated in the 1980s and early 1990s. The Philippines is often called the basket case of Asia.

Despite high growth in the past three decades, however, Indonesian income is still low compared with other countries. Thailand is enjoying a per capita GNP of $2,400, Singapore, $18,000, and Malaysia, $4,000. Comparison of incomes with industrial countries must use purchasing power parity, since the use of exchange rates exaggerates income difference. According to the United Nations' Human Development Report 1994, in 1991, in terms of purchasing power parity, Japan, Canada, Sweden, Switzerland, and the United States were enjoying roughly $20,000 of per capita GDP, while Indonesia was at $2,730.

The report of the United Nations quoted above also ranks countries in the world by the Human Development Index, which incorporates, besides per capita GDP, life expectancy at birth, adult literacy rate, and years of schooling. Out of the 173 countries, Indonesia ranks 105th, which is the second lowest of the ASEAN countries after Vietnam (which ranks 116th).

The problem of Indonesia is that it started from a low base in the mid-1960s. Despite a good growth record in the past three decades, Indonesia has a lot of catching up to do.